Economic Update: May 2010
Professor Joe Nellis
Andrew Kirchner
Welcome to the latest economic update with Professor Joe Nellis.
Now, Joe, news coming out of Brussels this morning; a €750bn
stability package by the EU, by the IMF, to stop the Greek crisis
spreading. Now, are we just postponing the inevitable?
Joe Nellis
I think we are actually; this is really an insurance policy for the
moment in the hope that those countries that have got bonds to be
redeemed, the government debt, can redeem them and if they
cannot then there is a fallback with this package as you just
mentioned. But this isn’t the end of the story; this really could get
out of control.
Andrew Kirchner
What measures is the Greek government taking to reduce it’s
deficit?
Joe Nellis
Well a whole range of measures have been announced, Andrew, on
the tax side and on the spending side – government spending.
On the tax side, for example, VAT is going to go up from 19% to 23%
- that is quite a shock for consumers who can’t avoid it of course. At
the same time they have also announced significant cutbacks in
government spending and that is going to be felt in the public sector
services over the coming years. They have announced for example
at €30bn cutback; in an economy as small as Greece that is going to
be very, very painful. And this isn’t going to be one year or two; this
is for several years ahead in order to get back to their target of
below 3% budget deficit – 3% of GDP – by 2014. Now at the
moment the budget deficit is already more than 13% of their GDP, so
I wouldn’t want to put any bets on achieving this. It is going to be
very, very painful indeed.
Andrew Kirchner
Now, what about the UK; we have got a big fiscal deficit and as we
speak talks are going on between the Lib Dems and Conservatives
about forming the next government if we need to do something
major?
Joe Nellis
We are really in this difficult position of getting a government
formed first of all and then whether or not we go for the Tory view
of a short, sharp shock – which will mean essentially significant
cutbacks in public spending very quickly – or go for the Labour Party
view, which was well somewhat more slowly recovering – still cutting
back expenditure, but taking it at a steadier pace.
It is hard to say what is going to happen because we are on a knife
edge here, but what is certain is there will be tax increases and there
will be government expenditure cuts of an order of magnitude that
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May 2010
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Professor Joe Nellis
we probably haven’t seen for thirty or forty years, back to the 1970s
perhaps.
Andrew Kirchner
And what is the outlook for the wider world economy? There is
some good news coming out of The States – 290,000 jobs created in
April.
Joe Nellis
Yes, the US looks like it is now fully on the path to recovery and we
hope the UK will follow, of course. So it is almost a two speed world
economy, maybe three speeds. We have got Europe struggling with
this crisis; UK growing very slowly within the European context;
America showing now significant growth prospects and business
confidence has risen sharply. And, of course, the emerging markets,
China and India are growing very strongly – in fact, perhaps booming
– at the moment.
So it is a rather unusual situation in that Europe which is a major part
of the world economy is struggling, while the rest of the world
moves ahead.
Andrew Kirchner
Joe, thank you very much for your thoughts.
Joe Nellis
Thank you, Andrew.
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May 2010
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